SECURE Act 2.0 – Significant Retirement Plan Changes for Retirees and Disabled Individuals

SECURE Act 2.0 became law on December 26 2022 as part of the omnibus spending bill. SECURE Act 2.0 is an attempt to build on the initiatives already started under the Setting Every Community Up for Retirement Enhancement (SECURE) Act signed into law in 2019. Here are a few key changes with the SECURE Act 2.0 that impact retirees and individuals with special needs or disability:

Increase in the Required Minimum Distribution Age (RMD)- Now Age 73

The SECURE Act of 2019 increased the required minimum distribution (RMD) age to 72.  The SECURE Act 2.0 increased the RMD age to 73 for participants attaining age 73 from 2023 to 2032, and age 75 for participants attaining in 2033 or later.

Participants in employer plans are still able to defer RMDs past these ages until retirement if permitted under the plan. The option to defer RMDs past these ages still isn’t available to any participant who’s a 5% owner.

Many taxpayers do Roth conversions between retirement and age 72 when they’re in lower tax brackets. This change will give those participants additional years to do Roth conversions during their lower tax bracket years before they must begin RMDs.

No Early Penalty on early distributions from retirement account for individuals with a terminal illness.

Secure Act 2.0 creates an exception to penalty on early distributions from qualified plans for individuals with a terminal illness. Under current law, an additional 10% tax applies to early distributions from tax-deferred retirement accounts. Section 326 provides an exception to the additional 10% tax in the case of a distribution to a terminally ill individual.

Modification of Required Minimum Distribution Rules for Special Needs Trust.

Under the SECURE Act, a trust for a disabled or chronically ill beneficiary is eligible for the life expectancy stretch so long as all of the current beneficiaries are disabled or chronically ill and the remainder beneficiaries are individuals or trusts for the benefit of individuals (i.e, not entities like charities). Upon the death of the disabled or chronically ill beneficiary, the 10-year rule applies.

However, in certain instances, an IRA owner leaving IRA benefits to a trust for a disabled child wants a charity to receive some or all of the remainder of the trust after the disabled child’s death.  For example, in some cases, a charity may assist the disabled beneficiary or fund research for their medical condition. In other cases, the IRA owner may not have any other children or heirs, or otherwise provides for them.

Section 337 of SECURE Act 2.0 now provides that in the case of a trust for the benefit of a disabled or chronically ill beneficiary, a charity that may receive qualified charitable distributions (a public charity other than a donor-advised fund) that is a remainder beneficiary will now also be treated as a designated beneficiary.

The change in law allows an IRA owner to create a trust for a disabled or chronically ill beneficiary and name a charity as a remainder beneficiary and still qualify for the life expectancy stretch during the disabled beneficiary’s lifetime. The life stretch can have significant financial advantage for the disabled or chronically ill beneficiary. Further, the new law gives special needs planners and families more options in drafting and funding special needs trusts.

-Stephanie A. Bivens, Esq, CELA

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